23 January 2012

Why the Greek rescue plan is condemned to a failure

Given the opportunity derived from the article posted by Mr. Provopoulos, Governor of the Bank of Greece to Financial Times this evening, i had the wish to reply.

My prediction is that the near future will reveal that the  views expressed by the governor of the Bank of Greece are unrealistic. Primarily for two simple reasons that are not at all discussed by Mr. Provopoulos.

First, the Government that is implementing the reforms, for a respectable proportion of the Greek public, is perceived as non-legitimate, non-democratically elected and thus non-socially acceptable. Although they have an enormous parliamentarian majority, the ability to make an effective policy change and reform the economy primarily depends upon the perception of how legitimacy the government is. In the Greek current case perhaps the government lacks of that dynamic. Hence, any policy change that is proposed and enacted will fall into the umbrella of the authoritarian decision-making hence will gradually increase the existing tension which will in the end lead to social unrest (at a level that the past will seem idealistic and peaceful compared to what will occur)

Second reason why the government's attempt to reform and restructure the economy is condemned to a massive failure concerns the issue of the disbelief and uncertainty derived from both domestic entities and foreign institutions and officials on whether the Greek economy can be viable by remaining in the Eurozone. Foreign agents ranging from public officials in the EU, IMF and ECB tend to offer opinions and statements that contradict, thus leading to an increase of the economic uncertainty. That disbelief of the success of the Austerity programme that is currently applied together with alternative scenarios that indicate Greece will not remain in the euro for very long destroy any positive attempt (if such exists) towards the increase of investments and expansion of the economic participation of the private sector. Assuming that today a private agent in Greece or abroad is interested in investing in a project and possesses the required capital to do so, the climate of uncertainty for the currency drives her to a delay and continuous postponement of the investing process. This delay is extremely rational given the enormous devaluation that will occur to a hypothesized new currency. An investor who decides to invest today in that unstable Greek environment is willing to take massive risks due to the immediate losses that will incur from a change in the currency and the devaluation that will follow as a consequence. Thus the potential investor chooses rationally to delay until the environment settles (and there is a political and economic guarantee what the currency will be in the medium-run).

Due to these two reasons my projection and economic forecast differs completely from that of the Governor of the Bank of Greece. I tend to believe that the push for reform and economic restructure will continue to expand while the response on behalf of the society and the private agents will continue to be defensive and negative. As the indicators will be on deficit from the expected ones further pushing for reforms will be required, by a perceived as non-legitimate government which will lead gradually to the perception of an aggressive strategy by the government and the aggression at some point will destroy the remains of the social cohesion within the Greek public with severe and perhaps threatening consequences. The existing economic strategy is condemned to failure due to the public opposition.

Stable Link for the Original Article by Mr. Provopoulos: http://clippings.ft.com/listnavigator/mwgs/1781471